San Diego start-ups raised venture capital at slower pace last year

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It was a tough year for IPOs in 2016, but San Diego's Airgain managed to get out with a successful stock offering. Local start-ups are hoping for a rebound in the IPO market in coming months, which will help keep venture capital flowing.

It was a tough year for IPOs in 2016, but San Diego's Airgain managed to get out with a successful stock offering. Local start-ups are hoping for a rebound in the IPO market in coming months, which will help keep venture capital flowing. (unknown /)

Venture capital flowing into San Diego County’s young companies slipped a bit last year – following a national trend of a pullback from high levels of investment in 2015.

Local firms corralled $1.07 billion in venture capital funding last year, according to The Dow Jones VentureSource. That’s down from $1.5 billion the prior year.

Eighty-seven San Diego area companies received funding last year based on the VentureSource data, down from 93 companies in 2015.

The decrease was expected, given that 2014-2015 were banner years for venture investments in start-up companies.

That exuberance sparked some sky high valuations for private companies not only nationally but also in San Diego. Local megadeals in 2015 included Sapphire Energy, which raised $91 million, and Suja Life, a health food juice maker that pulled in $150 million.

Those large funding rounds were largely absent last year for San Diego start-ups.

“I think from a trends perspective, when you talk locally or national, we are seeing less of those big unicorn deals and more toward the norm of $5 million to $30 million rounds coming in,” said Tim Holl, a San Diego partner with Ernst & Young, which works with Dow Jones VentureSource.

The slowdown in venture investments was most pronounced in the second half of last year, said Ryan Spencer, a San Diego partner with PricewaterhouseCoopers, which puts together the MoneyTree report on venture capital investment.

“We have observed a pull pack in the latter half of 2016 in terms of deal flow and total dollars invested,” said Spencer. “It tells me that venture investors were much more cautious in 2016 than in 2015, with less deal flow but in general more dollars per deal.”

While MoneyTree and VentureSource come up with different numbers, they tend to reveal similar trends about the venture capital landscape. For the fourth quarter, both reported a decline in investments compared with the prior year in San Diego.

Based on VentureSource data, 24 local companies raised $213 million in the fourth quarter, compared with 31 firms pulling in $554 million for the same quarter in 2015.

In addition to soaring valuations, 2016 was also a tough year for private companies seeking to go public and deliver a return to their venture capital investors.

Turmoil overseas with Brexit sparked stock market volatility. And that uncertainty continued through the contentious U.S. presidential election. The result was fewer companies going public in 2016 than any year since the 2008-2009 financial crisis.

“In San Diego, we have been about a billion dollars a year (in venture capital fund raising) for the last two or three years, and we have been about 90 to 100 deals,” said Holl. “We kept it up in what was a very challenging market for exits.”

Biotech and life sciences firms continue to corral the largest chunk of venture capital dollars in the San Diego region, with two-thirds of the dollars invested flowing into the health care sector, according to VentureSource.

But San Diego technology companies, particularly software firms, were able to attract investment last year, said Holl. Classy raised $30 million to expand its platform for helping non-profits raise money. Tealium pulled in $35 million for its website tag management software. And marketing content management firm Seismic got a $40 million investment.

“We had a couple of nice ones on the technology side,” said Holl. “There have one or two per quarter that have been descent sized investments.”

Nationwide, venture capital investment declined 32 percent last year to $52.38 from 2015 levels, according to VentureSource.

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